AVE, expensive or cheap?

Joaquín de Fuentes Bardají.

The author writes on the process of liberalization of the railway transport of travellers, and defends that its feasibility depends on four principles that are fundamental for competition.

In February 2010, Renfe Operadora took the decision to raise AVE (Spanish High Speed trains) fares drastically with the argument that a company operating under a monopoly system maximizes profits by keeping prices high. The measure, which was used by the airline companies to regain share in the transport market, remained until February 2013 when the Administration tutoring Renfe, the Ministry of Development, gave the instruction to lower prices again in order to address the fall in occupancy of trains.

The measure has served to revive demand but also probably to worsen the financial results. The question to be asked at all is: who is right? the managers of AVE/Renfe, or the tutoring Ministry by assuming the definition of the trade policy of a substantial part of the system of public passenger transport?

The situation has a precedent that may be useful to remember: until 2008, when it was put into operation the Madrid-Barcelona AVE, ​​a single journey between these two cities in the airlift could cost 220 euros. The AVE and the rest of the airline competition has caused to ​​reduce the average ticket paid on this journey to 60 euros (this saving, of nearly one billion euros annually in the form of consumer surplus, should certainly be taken into account by those denying the profitability of investments in AVE). Market sharing -60% for the train, 40% for the plane- has in turn an uneven distribution: while airlines compete between themselves as well as with the AVE, Renfe has no competitor but itself within the railway system. The situation seems comfortable for the public monopoly: its chairman recently stated that “this runner will win more than 80 million euros this year.”

We hope that the way to introduce the competition shall be better than that used in the transport of goods”.

This situation, with its contradictions and inconsistencies, has been kept for almost six years. However, the current Government has announced the introduction of principles of competition in the market for rail transport services of passengers. We hope that the way to introduce the competition shall be better than that used in the transport of goods in 2005, where competition has not flourished and Renfe continues to reap huge losses which are lumbered to the public treasury.

The design of the liberalization process for travellers should be intended mainly for its feasibility, ie, its ability to provide long-term and stable mechanisms improving the efficiency and quality of the service. In the opinion of the professional group making up Future Rail, this feasibility shall be only possible with the generation of competition rules containing four fundamental principles:

  • Market of sufficient size. It is essential to promote solvent entrepreneurial initiatives, eliminating the possibility of giving entry to speculative operators. As an indication, it should be noted that a train of 400 seats making an average of 4 daily journeys between two cities will be eventually able to transport almost half a million passengers in one year. An operator with only four trains can transport a number of passengers equal to what Renfe currently carries between Madrid and Valencia or a third of what it transports between Madrid, Zaragoza and Barcelona. That is, an operator of small size invades any market as individually considered. If the effect we want to achieve is that the investment of new entrants is significant (solvency) and that such investment does not end up creating an effect of displacement (Archimedes’ principle applied to markets) but of competition, the market size has to be large enough for not leading to a series of monopolies (public monopoly replaced by private monopoly) and proportionate to the size of the operators seeking to operate on it. This principle is fundamental because we all know how vulture companies and funds can be harmful.

“The persistence of situations from the stage of the monopoly would be a poison for the health of the system”.

  • Limited number of competitors to be admitted in the market. According to the principle applied to mobile telephony and radio-electric space, the capacity of the rail infrastructure also imposes a limit on the number of operators to be admitted. The restriction has to do both with the principle of market size (the lower the potential demand may be, the fewer competitors shall reach their break-even) and with the ability of the infrastructure itself, which is directly related to the speed of the trains and the signalling system (safety) employed.
  • Dynamics of stimulus to competition. In order to produce improvements in efficiency (cost reduction, price reduction) and quality of service, transparent play rules respectful to the principle of equal opportunities for all competitors are essential. The persistence of situations from the stage of the monopoly would be a poison for the health of the system, as well as the possibility that any of the competitors could continue appealing to subsidies or public funding in a privileged way. The competition must be clean, preventing the existence of cross-subsidies in the old monopoly.
  • The CNMC (National Commission on Markets and Competition) will have a key role in monitoring the correct opening to the competitiveness of the market for high speed and, out of its immediate intervention, the success of the model will depend to a great extent, given the foreseeable resistance that will arise from the former public monopoly and the future incumbent company.

“Administrative, technical and technological barriers must be obstacles to be removed”.

  • Accessibility to the operation system. Administrative, technical and technological barriers must be also obstacles to be removed. The regulatory framework, the acknowledgement of licenses, the use of the underutilized public fleet of trains, the access to timing paths in terms of fairness and transparency and the use of common areas of rail service on equal terms to all operators should be essential requirements of the new system of competition.

It is likely that to progress in this direction with these and some other measures of organization of the new rail system could help to create a space of competition capable to offering better transport services to the citizens and where the mechanism of fixing balanced pricing should be the market rather than political authorities or officials of services whose professional future is not subject to the risk of consequences of their decisions.

From these perspectives is how we think, from Future Rail, that the process of liberalization of the railway sector in Spain has to be undertaken. In that respect it is good to consider past experiences, either successful or otherwise, both in Spain (telecommunications, electric…) and in other countries (UK or, soon, Turkey).